Introduction

Postal companies are still being ignored (or punished) by the market. Sometimes that’s deserved, but other times it seems to be more sentiment-based than fundamentals based. Yes, the ‘normal’ old-school post market is shrinking, but companies have been trying to tap into new sources of revenue (CTT Correios de Portugal (OTC:CTTPY) has started a bank), or are trying to improving the sorting and handling system to increase the volume of parcels.

Did you miss the previous edition of the Nest Egg Portfolio? You can re-read it here.

Portfolio update

Introduction

PostNL (OTCPK:PNLYY) has reported its financial results over the first half of the year, and they weren’t great. It’s becoming a real tradition: Postnl going down when it reports its financial results.

Source: finanzen.net

What went wrong this time?

First of all, the Cash operating income was substantially lower in Q2 2018 than the same quarter a year ago. Although the revenue increased by almost 2% to 851M EUR, the cash operating income decreased from 46M EUR to 25M EUR. This 21M EUR decrease was caused by all divisions (so it wasn’t just letter ‘normal’ mail that put in a weak performance, it was a weak quarter overall). The parcel division, for instance, saw a 21% revenue increase, but a 6% lower cash operating income. That’s not impressive.

Source: press release

Secondly, the international operations actually resulted in a cash operating loss (which also isn’t helpful). However, PostNL announced it will be divesting Nexive and Postcon, the Italian and German subsidiaries. I’m not expecting PostNL to make a lot of money on these sales, but at least it will stop the cash bleed in these countries. Adding the cash operating loss of the IT and D operations back to the consolidated operating income, we would see a 15% increase. So I think this is a good move as it’s better to be a ‘good’ parcel/mail delivery service in just a few core markets (the Netherlands & Belgium) rather than running a very fragmented business. Selling the Italian and German divisions shouldn’t be a surprise; PostNL already sold its British division a few years ago.

The implementation of the cost savings is going slower than expected. After cutting 56M EUR of expenses last year, PostNL was aiming to reduce the operating costs by an additional 50-70M EUR this year. However, as only 18M EUR was realized in the first half of this year, the minimum cost saving target of 50M EUR will not be met. A bummer.

The visibility for 2019 and beyond is still uncertain. The regulating body has published its preliminary tariffs for post service operators, but PostNL filed an appeal against the proposed tariffs. PNL doesn’t expect a court ruling before September (and it will very likely be later than that). Although PostNL isn’t officially withdrawing its 2020 vision, the visibility is pretty much zero.

Source: company presentation

The positive side

The pension fund remains (more than) fully funded. As of at the end of Q2, the coverage ratio was 116.1%, well above the minimum threshold of 104%. Unfortunately, PostNL still has to deposit more cash in the pension fund, and I’ll figure out when these payments will stop. Officially, PNL will be required to continue to make the payments until 2020 (as part of a 5 year plan which started in 2015). I would assume that due to the overfunding situation, the top up payments might be halted sooner, but I’m not sure PostNL can just stop paying. So in a worst case scenario, the pension payments will still have to be made until 2020.

Source: company presentation

The dividend

PostNL is maintaining its aim to have a ‘progressive dividend’ and is proposing to pay an interim dividend of 7 cents per share. The ex-div date hasn’t been shared yet (but I would expect it to be soon). PostNL is offering an election dividend, and shareholders can choose between receiving the 0.07 EUR in cash (subject to a 15% Dutch withholding tax) or in stock.

As a reminder, PostNL paid a dividend of 0.23 EUR per share over FY 2017, which represents an 8.1% dividend yield based on the current share price of approximately 2.85 EUR.

The conversion rate for the stock dividend will be fixed based on the average 3 day VWAP between August 21-23, and looking at the current share price, this will result in approximately 1 new PostNL share per 41 shares in the portfolio. As the stock dividend will be booked as a distribution of reserves, there will be no Dutch withholding tax on the stock dividend. This would result in adding 38 free shares to the ESCI portfolio, and reduce the average purchase cost of the position to approximately 3.58 EUR per share.

Conclusion: back to square one

I’m not impressed, but I’m also not surprised. I’m not averaging down at this moment, but if the share price remains stable at 2.85 EUR during the dividend conversion rate period, I will take the dividend allocation in stock, which would increase the position in the Nest Egg Portfolio to 1619 shares at an average price of 3.58 EUR.

Other additions/removals

As mentioned on my InstaBlog (if you didn’t get the email alert, you could consider hitting the ‘Follow’ button to remain up to date on sudden moves in the Nest Egg Portfolio), I sold the remaining 100 shares in OCI NV (OTC:OCINF) (OTCQX:OCINY), and covered the written put 25. Although competitor CF Industries (CF) has posted excellent results and the stronger US Dollar is excellent for the Euro-based share price, it was time to cash up and take a 50% profit on this position.

I’m charmed by the performance of Klépierre (OTCPK:KLPEF), and I think the company is definitely undervalued. You can re-read my entire investment case here, and I am writing a put option in an attempt to increase the position at a lower share price. I elected to write 1 P 32 December 2017 for an option premium of 1.40 EUR (the midpoint between bid and ask, see the next image). The net cash inflow after deducting the 3 EUR transaction fee is 137 EUR.

Source: Interactive Brokers screenshot

As it looks like the put option on Orange Belgium (OTC:MBSRF) (OTC:MBSRY) with a strike price of 16 EUR will expire ‘in the money’ in September, I have to be careful to avoid going overweight. The company is still cheap, but is facing some headwinds that will have to be dealt with. Rather than committing more capital right now, I am writing 1 put option, expiring in December as well, with a strike price of 12 EUR. The midpoint of this option is 0.56 EUR, but I will assume a price of 0.55 EUR, resulting in a cash inflow of 52 EUR.

Source: Interactive Brokers screenshot

It now looks extremely unlikely Flow Traders (OTC:FLTDF) will be trading above 34 EUR per share by the expiration date in December. That’s a little bit disappointing as I wouldn’t have mind the 3,400 EUR cash inflow, but fortunately this won’t result in a cash crunch in the portfolio.

Incoming dividends

Four companies paid a dividend since the previous update; the net dividends (based on a 15% withholding tax) add up to 331 EUR, and this has been added to the cash position. BinckBank (OTC:BINCF) (OTC:BINCY) had a good second quarter which translated in a higher interim dividend, whilst Real Estate investments Hibernia REIT (OTCPK:HIBRF) and Wereldhave (OTC:WRDEF) also paid their dividends.

The current portfolio + updates

Noteworthy Europe-focused articles here on Seeking Alpha

This week’s hot topic obviously was Atlantia (OTCPK:ATASF) (OTCPK:ATASY), which operates the highway where a bridge collapse killed a few dozen people. The Italian government said it wanted to take the concession away from Atlantia ‘by avoiding the legal procedure’ and this obviously spooked investors. Approximately 6 Billion Euro was wiped off Atlantia’s market capitalization, but I’m not sure the government could take away the concession without paying damages. Damages to the tune of billions (in case Italy meant it would revoke the nationwide highway concessions), billions Italy can’t really afford right now.

Source: Yahoo Finance

Erich Reimer has been reviewing Deutsche Bank (DB) to figure out if the bank’s new CEO has made a successful start to (slowly) turn the banking giant around. Reimer thinks the financial institution might have reached the turning point, but it will be a slow process to see the share price move to higher levels.

Ingenico (IGNIF) (IGNIY) had a few bad days after Reuters unveiled some reports about negotiations with private equity funds that were potentially interested in taking Ingenico private. Those talks fell through, and Ingenico will now very likely have to continue on its own. Not a big deal for me, as I explained why the company’s targets for 2020 remain achievable. A quick buyout would be a nice payday, but Ingenico should be able to get back to 100 EUR per share on its own. That being said, with a current share price of 66 EUR, private equity funds or strategic buyers might be tempted to come back to the negotiation table…

Callum Turcan, who specializes in oil and gas, has provided an update on Total (TOT) and its commitment to boost the output in Angola. Angola is a member of the OPEC, and has been cutting back its production as part of the OPEC curtails. However, this wasn’t by choice, says Callum, as Angola simply doesn’t have enough good oil fields and hasn’t seen sufficient investments in developing the oil fields in the recent past. This will change soon as the Kaombo oil project (Total is operator, but Exxon Mobil (XOM) and Sinopec (SNP) are partners) will produce in excess of 200,000 barrels of oil-equivalent per day from 2020 on.

Conclusion

The incoming dividends and the sale of OCI NV have boosted the cash position to almost 10,000 EUR. That being said, the level of commitments has also increased, as the total ‘risk’ for the new put options is 4,400 EUR, so cash management will remain important. I expect the put options on Orange Belgium and Bpost (OTC:BPOSF) (OTCPK:BPOSY) to expire ‘in the money’, which means we will have to fork over 3,200 EUR to cover those purchases.

On the other hand, the put options on Wereldhave and Binck as well as the call option on Royal Dutch Shell (RDS.A) (RDS.B) will expire worthless. Additionally, the incoming dividend from BT Group (BT) will add more than 400 EUR to the cash position (but the final amount will depend on the GBP/EUR conversion rate on the payment date).

There has been some volatility on the European markets, but I’m not taking any action just yet. Should I initiate a new position or sell an existing position, I will post a real-time update on my InstaBlog here at Seeking Alpha.

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Disclosure: I am/we are long PNLYY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also have a long position in BINCF, BPOSF, BT, CTTPY, KLPEF, MBSRF, RDS.A, TOT and WRDEF. I buy stock on their ‘home markets’.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.